Lisa Ortega is president of Ortega Riding Academy, Inc. The academy's primary sources of revenue are riding fees and lesson fees, which are paid on a cash basis. Lisa also boards horses for owners, who are billed monthly for boarding fees. In a few cases, boarders pay in advance of expected use. For its revenue transactions, the academy maintains the following accounts: No 1 Cash, No. 5 Boarding Accounts Receivable, No. 27 Unearned Boarding Revenue, No. 51 Riding Revenue, No. 52 Lesson Revenue, and No. 53 Boarding Revenue.
The academy owns 10 horses, a stable, a riding corral, riding equipment, and office equipment. These assets are accounted for in accounts No. 11 Horses, No. 12 Building, No. 13 Riding Corral, No. 14 Riding Equipment, and No. 15 Office Equipment.
For its expenses, the academy maintains the following accounts: No. 6 Hay and Feed Supplies, No. 7 Prepaid Insurance, No. 21 Accounts Payable, No. 60 Salary Expense, No. 61 Advertising Expense, No. 62 Utilities Expense, No. 63 Veterinary Expense, No. 64 Hay and Feed Expense, and No. 65 Insurance Expense.
Ortega makes periodic payments of cash dividends to stockholders. To record stockholders' equity transactions in the business, Ortega maintains three accounts: No. 50 Common Stock, No. 51 Retained Earnings, and No. 52 Dividends.
During the first month of operations an inexperienced bookkeeper was employed. Lisa Ortega asks you to review the following eight entries of the 50 entries made during the month. In each case, the explanation for the entry is correct.
May 1 Cash 18,000
Common Stock 18,000
(Invested $18,000 cash in exchange for stock)
5 Cash 250
Riding Revenue 250
(Received $250 cash for lessons provided)
7 Cash 300
Boarding Revenue 300
(Received $300 for boarding of horses beginning June 1)
14 Riding Equipment 80
(Purchased desk and other office equipment for $800 cash)
15 Salaries Expense 400
(Issued dividends checks to stockholders)
20 Cash 148
Riding Revenue 148
(Received $184 cash for riding fees)
30 Veterinary Expense 75
Accounts Payable 75
(Received bill of $75 from veterinarian for services rendered)
31 Hay and Feed Expense 1,700
(Purchased an estimated 2 months' supply of feed
and hay for $1,700 on account)
With the class divided into groups, answer the following.
(a) Identify each journal entry that is correct. For each journal entry that is incorrect, prepare the entry that should have been made by the bookkeeper.
(b) Which of the incorrect entries would prevent the trial balance from balancing?
(c) What was the correct net income for May, assuming the bookkeeper reported net income of $4,500 after posting all 50 entries?
(d) What was the correct cash balance at May 31, assuming the bookkeeper reported a balance of $12,475 after posting all 50 entries (and the only errors occurred in the items listed above?)
(a) May 1 Correct
5 Cash 250
Lesson Revenue 250
7 Cash 300
Unearned Boarding Revenue 300
14 Office Equipment 800
15 Dividends 400
This solution is comprised of a problem which required identifying journal entries that are correct and entries which are incorrect. The problem also requires that the correct net income and cash balance be calculated. The problem shown here is taken from Financial Accounting, 6th ed., and Accounting Principles 10th ed., Wiley Publishing, however, the detail step-by-step explanation of this topic provides students with a clear understanding of the concept